Real estate capital market trends & applications

Real Estate Issues, Dec 1997 by Muldavin, Scott R

The explosion in the availability of real estate capital markets data has underscored the importance of determining which information is important, and how it can be applied to assist real estate decision-makers.

INTRODUCTION

The real estate industry seems to have "bought," literally, the assumption that real estate capital markets information is critical to investment decision-making. There are over 100 publications whose primary mission is to inform the industry about trends in the real estate capital markets. These publications include those covering the broad "capital markets" like Institutional Real Estate Inc.'s Real Estate Capital Markets Report; Institutional Investor's Real Estate Finance; and Warren, Gorham & Lamont's Capital Sources For Real Estate, to scores of single source publications such as Commercial Mortgage Alert; Mortgage Banker; Institutional Real Estate Letter; The REIT Report; The Stanger Report; and the Journal of Commercial Lending. Additionally, scores of publications and internet sites propagated by real estate firms, trade journals, and news magazines provide a virtual "title" wave of real estate capital flows information.

The explosion in the availability of real estate capital markets data has underscored the importance of determining which information is important, and how it can be applied to assist real estate decision-makers. In many ways, today's real estate capital markets "information industry" is similar to the real estate property markets industry 15 years ago. Just like property market information 15 years ago, capital markets information is poorly defined, not appropriately segmented, and has few standard definitions or measurement techniques. However, property market information has become significantly more valuable over the last 15 years, as users determined how and why they wanted to use information. This pushed providers to improve quality and access. Similar trends need to take place in the real estate capital markets "information industry" to enable decision-makers to improve their performance.

This article addresses real estate capital market needs in four ways:

Defines what the real estate capital markets are and the kinds of real estate capital markets knowledge available;

Segments the users of real estate capital markets knowledge into four distinct groups;

Presents decision-based strategic frameworks that link specific information needs to specific applications for distinct user groups; and,

Provides a future forecast of capital market conditions based on The Roulac Group's proprietary historical capital markets indices.

DEFINING THE REAL ESTATE CAPITAL MARKETS

The real estate capital markets are an aggregation of the 17 real estate capital providers shown in Exhibit 1. In order to understand the flow and changes in the real estate capital markets, the economic forces and motivations influencing each of the 17 providers must be understood.

The dramatic growth in the commercial mortgagebacked securities and public real estate investment trust marketplace since 1990 have expanded real estate into the "four quadrants" as shown in

Exhibit 1. Real estate capital can be split into: Private debt, Public debt, Private equity, Public equity, and Corporate. The growth in the commercial mortgage-backed securities and REIT marketplace have transformed the real estate capital markets in recent years, bringing the liquidity, corporate governance, and Wall Street activity characteristic of other asset classes.

The changing structure of the real estate capital markets is shown in Exhibit 2. Private debt, still the dominant quadrant, has shrunk from a 56 percent share of the market to only 48 percent in 1997. The private equity marketplace has also declined nearly 7 percent, while the public debt and public equity markets have moved from an 8 percent share in 1980 to nearly a 25 percent share of the market in 1997. These trends are expected to continue.

The total size of the institutional real estate capital markets was approximately $1.6 trillion, as shown in Exhibit 3. Corporations are also major players in the real estate capital markets, although they are not easily classified into any of the four quadrants. Corporations raise capital publicly through equity or debt offerings, as well as privately, and are properly evaluated outside of the "four quadrants" of institutional real estate capital. Estimates of corporate real estate involvements exceed $2 trillion in the U.S.

Real Estate Capital Markets Knowledge

The next step in being able to apply real estate capital markets knowledge to decision-making is to understand the different types of real estate capital market knowledge required by decision-makers. Most importantly, for strategic purposes, decisionmakers need to be able to predict future changes in capital flow activity. Historic information is necessary to provide a context for interpreting the present and future, but alone does not provide adequate insight to make strategic decisions. Accordingly, the foundation for the analysis of overall trends in the real estate capital markets is the detailed fundamental analysis of each of the 17 real estate capital market providers shown in Exhibit 1.